This article explains how a cryptocurrency gains value in general. TFX may or may not be affected by the following factors. The article is only aimed to educate and should not be taken as investment advice.
As we are all well aware of it, there’s no denying that cryptocurrency shows large fluctuations in price. The constant bombardment of crypto’s highs and lows in our news feed may give us the impression that it’s a tricky thing to deal with.
Even so, investing in cryptocurrency is all the rage these days and can still be a lucrative investment opportunity, given that you understand how its value is formed.
So let’s dive into what makes cryptocurrency valuable.
The same principle of supply and demand, for just about anything else, applies to cryptocurrency: Higher demand pushes prices up. The supply mechanism of a cryptocurrency is always known and it differs from each crypto to the next. The most popular crypto, Bitcoin, has a finite nature whereby it never goes beyond 21 million coins. Meanwhile others like Ether, have no cap on supply. Hence, they depend on mechanisms that “burn” existing tokens to prevent the circulating supply from growing too large and slowing inflation.
New cryptocurrency coins are produced through a process called mining. Essentially, mining involves computing power to verify the next block on the blockchain. In order to mine, participants invest in expensive equipment and electricity to do so. As mining costs increase, the value of the cryptocurrency also increases. The reasoning behind this is miners won’t mine if the value of currency they’re mining for isn’t high enough to offset their costs.
In the crypto market, there are thousands of different cryptocurrencies in existence and new ones get launched every week. Despite the low entry barrier for new competitors, the real challenge lies in creating a viable cryptocurrency that a network of users believes in. If the blockchain is useful, especially if it overcomes the limitation of other competitors, it can swiftly gain momentum. Thus, the new coin draws value away from the existing coin, increasing in its price as the existing coin sees a move down.
Popular cryptocurrencies like Bitcoin and Ether trade on multiple crypto exchanges, however some smaller tokens are only available on selected exchanges, hence limiting access for some investors. If the cryptocurrency is more readily available on numerous exchanges, it may be more valuable as more investors are willing to buy it and in turn, increases demand for it.
To briefly sum up, cryptocurrency gains value on key factors like supply and demand, cost of production, competition against other coins and its availability on cryptocurrency exchanges. Now that you have a clearer idea on how the value comes about in general, read how TFX gains value.
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